If your only information about investing comes from popular media, you’ve probably heard of hedge funds. Most people think of hedge funds as investments for the uber-wealthy that generate enormous investment returns.
Is that the case? And can a regular person like you invest in a hedge fund?
Let’s take a look at traditional hedge funds, and how disrupters like Titan (an app built like a hedge fund) are creating more access for everyone. We partner with Titan to look at hedge funds and how their app is changing the game.
If you want to skip ahead, check out Titan here and see how they’re changing the game >>
What Is A Hedge Fund?
At its very core, a hedge fund is fairly simple. An investment manager manages a pool of money for limited partners. Often the limited partners are members of a wealthy family or business partners.
One of the most important characteristics of hedge funds is concentration. Whereas a vanilla ETF usually replicates the performance of hundreds of securities (e.g., an S&P 500 ETF replicates the 500 stocks in the index), a hedge fund is much more concentrated in the hopes of outperforming. For instance, some of the more classic hedge funds will often only own 15-30 stocks, but do rigorous amounts of research in selecting them.
The term hedge fund derives from the ability of the fund to “hedge” its investments. Often times, a portfolio manager will bet against stocks in addition to buying them. For example, the manager may invest in Amazon while simultaneously betting against brick and mortar retailers.
However, the term can be applied broadly. For example, while Warren Buffett’s Berkshire Hathaway technically isn’t a hedge fund (they don’t bet against anything), it is often mentioned in the same breath given its concentrated strategy: invest only in a concentrated basket of securities.
Hedge fund managers also have the ability to “lock in” money for as long as several years. This ensures that the manager can properly manage the investments without investors pulling out of the fund.
Because investment managers have so much latitude to their investing techniques, most hedge funds are only open to wealthy people called accredited investors. Some hedge funds even require net worth in the multiple millions of dollars before you can invest.
Are Hedge Funds Good Investments?
Hedge funds may be designed to deliver long-term outperformance given their concentrated nature.
However, that doesn’t mean that hedge funds would make a good investment for you. On average, hedge funds have the following unfavorable characteristics:
- High fees. A typical hedge fund charges a 2% annual fee plus 20% of all profits.
- Lock up your money. As a hedge fund investor, you may not be able to get your money when you need it. Fund managers may legally lock you out of your investment for one to five years.
- Very complex. Fund managers can invest in everything from credit default swaps (yes, like in the movie the Big Short) to options against beef and everything in between.
- Risky techniques. While many hedge funds are designed to reduce volatility, the tools used are often viewed as risky. For example, a fund manager may leverage a portfolio which amplifies both gains and losses.
With these issues at play, most hedge funds aren’t a great investment for everyday people.
Titan - Making Hedge Funds More Accessible
Titan, a hedge fund disrupter, is aiming to make hedge funds more accessible for everyday people. Titan believes that more people should have access to the outstanding returns and white-glove treatment offered by the best hedge funds without all the risks.
Unlike traditional hedge funds, with Titan, your money is not pooled with all the other investors’ money. Instead, your money is held in a personal account where you can withdraw your money in just 2-4 business days.
Titan also doesn’t employ risky strategies like leverage or investing in corn futures.
So how is Titan like a hedge fund?
Like classic hedge funds, Titan invests the capital of its clients in a concentrated basket of only 20 stocks.
Titan analyzes the filings of the ~5% of hedge funds in the United States that they believe most closely align to a “buy and hold” strategy of investing in US stocks. Using the information from these filings, Titan puts investors’ capital into 20 US stocks that appear most frequently in the filings of the selected hedge funds. The company updates investor holdings once per quarter.
Since Titan promotes a “buy and hold” strategy, investing through the company could make sense for people with a long-term investment horizon.
Titan is also like a hedge fund in that it has a personalized hedge for all of its users so that its clients have the opportunity to potentially make profits when the market declines (hence the name hedge). The way it does this is by taking a portion of all clients’ capital and betting against the S&P 500. It’s usually 5-20% depending on an investor’s goals. Titan believes this can be crucial in down years; for example, Titan’s investors are poised to reduce losses or possibly even make gains.
For example, if you think the stock market is currently at all-time highs, and a recession is coming, this hedge could help mitigate some of the potential volatility.
But shorting is just one half (or more accurately 5-20%) of Titan’s strategy. The more important focus should be where Titan goes long (or invests the bulk of your money). Investors with Titan will have 80-95% of their portfolio in US Stocks
Curious? Check out Titan here >>
More Details On Titan
Since Titan uses algorithms and machine learning to invest your money, it probably sounds a bit like a robo-advisor.
However, the company also commits to taking the black box away from investing. Instead of only showing a chart of performance, Titan’s users get regular access to digestible investing insights.
As an investor, you’ll get short videos about what a stock market change means for your portfolio. You can also request deep dives, so you can understand each of the 20 stocks in your portfolio. Another cool feature? These notes are available via audio, so you can listen on your daily commute.
The fees for Titan are higher than most robo-advisors. But at 1% of your portfolio, the fee Titan charges is a bargain compared with the 2% management fee plus 20% profit fee charged by most hedge fund managers.
Bottom Line: Is investing In A Hedge Fund Right For Me?
If you’re a regular Joe or Jane, a traditional hedge fund is likely out of your reach.
But if you have the aspirations of investing like the wealthy, investing through Titan’s platform may be the right option. Weigh your options carefully, but consider the platform as one of the most accessible ways to compound your capital.
Check out Titan here and see for yourself >>
This article is a paid partnership with Titan Invest (“Titan”). All opinions are our own. This is for informational purposes only and does not constitute a comprehensive description of Titan’s investment advisory services. Titan uses a proprietary algorithmic strategy in selecting recommendations to advisory clients. Please see Titan’s website (https://www.titanvest.com/) and the Program Brochure (available on the website) for more information. Certain investments are not suitable for all investors. Before investing, consider your investment objectives and Titan’s fees. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested. Nothing here should be considered as an offer, solicitation of an offer, or advice to buy or sell securities. Past performance is no guarantee of future results. The above content is for illustrative purposes only to demonstrate products, services and information available from Titan. Please see Titan’s website for full disclosures.